Stimulus Plan Update

(January 24, 2008) President Bush announced today that the White House has reached an agreement with Speaker Pelosi and Minority Leader Boehner on the components of the economic growth package they have been working on. The details of the package are outlined below:

Total package of just over $150 billion.

$103 billion in checks will be mailed to 117 million families including:

$300 checks ($600 for those filing jointly) to people who earned at least $3000.

$300 additional check per child. (Go forth and multiply.)

$600 checks ($1200 for joint filers) for people who actually paid taxes last year.

Checks phased out for incomes above $75,000 ($150K for joint filers.)

$50 billion in business tax cuts including:

one-year bonus appreciation.

allowing small businesses to expense (instantly depreciate) up to $250K in capital spending this year. (The previous measure, which allowed expensing up to $125K expired in December.)

A temporary increase in the conforming loan limits for Fannie Mae and Freddie Mac from $417K to roughly $750K, which would make mortgage loans in that size range easier to securitize and sell to investors.

There were no tax increases in the package (duh!), no increase in unemployment benefits, no increase in food stamps and no additional public works spending projects.

All in all, a pretty clean deal. Could have been worse.

Later in the day I was on a conference call with Ed Lazear, a very smart labor economist and Chairman of the President’s Council of Economic Advisors, and a number of other economists. Ed said they were comfortable it could happen quickly–Senators Reid and McConnell agreed before the deal was done that the House should take the lead on the package details. There will still be some brushfires–Senator Baucus has already indicated he wants more unemployment pay in the deal. But it will get done.

The Treasury believes they can process the paper work and get the first checks out in 60 days, which means most people will get checks in April or May.

Ed said they believe this will raise 2008 GDP by 2/3-3/4 of one percent. At today’s $14 trillion GDP that would be $94-105 billion.

I suggested that the problem with the economy is not getting people to spend money but getting investors to own securities, which could be accomplished by giving investors better visibility over future cash flows. I asked whether there were any discussions about the damage being done by the Congressional witch hunt proposals targeted at investors (No.) I asked why the most powerful medicine in the package–the increase in conforming loan limits–was made temporary, which would leave a year’s worth of temporarily conforming loans stranded as orphans in the capital markets (They thought the markets would price them efficiently.)

I don’t agree. Making loans conformable means allowing them to be packaged and sold as commodities, which will improve their marketability to investors. But investors want to invest in a stream of loans, not one-time packages. And recent events show that there is a fatal flaw in the way the capital markets price securities. The dominant pricing methodology–variously known as Modern Portfolio Theory, CAPM, or Black-Scholes–assumes that markets are in equilibrium at all times. That is clearly not the case. It is the temporary breakdowns–the ones I have called blackouts–that are responsible for crises.

As I wrote yesterday, I don’t believe the stimulus package will do a lot of good–at most a half percent bump in GDP for one-year and a roughly equivalent drop in the following year as businesses pay higher taxes again–but it won’t do a great deal of harm either. We should keep our eyes on the process over the next couple of weeks to make sure nobody slips anything else into the deck. I will be arguing very hard that, at the very least, they should make the increased loan limits permanent–it will cost nothing to do it and do a lot to unfreeze the mortgage market. Looks like the real stimulus package–making the 2003 tax rates permanent so people can value securities–is off the table for a while. I expect that to be the center of the upcoming state of the union message.